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‘Slowbalisation’: why Swedish companies are moving back home

Sweden has a dynamic, modern economy, led by Stockholm’s status as an international innovation and startup hub. But you may be surprised to learn that a growing number of Swedish companies with production bases overseas are choosing to move these operations home.

‘Slowbalisation’: why Swedish companies are moving back home
Photo: Getty Images

Experts say the trend is part of the process of ‘slowbalisation’ and can even be seen in services, as well as manufacturing. 

So, what are the reasons for the change and what does it mean for the Stockholm region, the jobs market and the Swedish economy as a whole? The Local spoke to Joacim Tåg, of the Stockholm-based Research Institute of Industrial Economics (IFN), and the CEO of one company that has taken the leap, to find out.  

Stockholm is a global innovation hub and the Stockholm Business Alliance spans 53 Swedish municipalities – find out more

Reasons for reversing 

Costs, increasing automation, sustainability, and intellectual property are all drivers for Swedish companies to give up producing abroad, says Tåg. “I think a lot of companies have reversed their decisions after realising they made mistakes along the way,” he says. 

One reason for this is that rising labour costs in China and other Asian economies may mean what made economic sense a decade or so ago doesn’t look so sound now. “Big macroeconomic shocks like the Covid-19 crisis also provide an opportunity for companies to look over their operations and try to cut costs,” adds Tåg.

Furthermore, increasing automation makes labour costs a less critical factor for many firms. “That means you don’t need to produce in these countries any more, many of which have more unstable institutional environments that are not well-suited to large investments in automation and factories,” he says. Some companies may also be motivated by the ability to better protect their intellectual property by moving production home, he adds.

ChromoGenics, which makes high performance energy-efficient glass, decided to move its main production facility from the US back to Sweden after sourcing advanced technical equipment from a company in Germany that had gone bankrupt. 

In April this year, production began at its new plant in Uppsala, where seven permanent new skilled jobs have been created. In total, the move may have created work for 20 to 25 people, including a pool of students from Uppsala University, according to the company’s CEO, Leif Ljungqvist. He says there are no disadvantages of producing in Sweden.

“The reasons for moving home were to have better quality control over the production process and also that the transportation costs were quite high,” Ljungqvist explains. “Sustainability is obviously also a factor.”

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How highly-skilled workers win 

Both the true extent of the trend and its overall impact could be much better understood. That’s why Tåg is starting a research project that will analyse which jobs continue to disappear abroad and which are coming back to Sweden. 

“It’s a net positive when production moves back home,” he says. “However, the jobs you get back are not the same jobs you lost when you offshored to get cheap labour in China. Typically, when you’re investing in a high-tech factory in Sweden, it’s more highly-skilled jobs that are created and the low-skilled jobs don’t come back.”

Joacim Tåg

The new ChromoGenics facility is “fairly automated” and only workers of “high competence” can run the machinery, says Ljungqvist. Such engineering expertise has a similar cost whether you’re recruiting in China or Sweden, he adds.

Tåg cites AI as another area where tech continues to require expert supervision rather than completely replacing human labour. “In some areas, we see shortages of tech workers because tech advances but then you need the workers that take care of the technologies,” he says. 

Stockholm’s status as a startup and fintech hub – along with low interest rates and an active venture capital market – is also likely to ensure demand for highly-skilled workers remains strong in the city. “A lot of Stockholm firms are on the leading edge of technology and that leads to skill shortages,” Tåg says.

Local ‘spillover’ benefits 

While the overall number of jobs being created nationally so far is modest, it’s important to understand the potential for significant local “spillover” effects.

Setting up a big production plant in Sweden has indirect as well as direct benefits; other local firms may become suppliers, for instance, and there may be opportunities for new restaurants or other services. “It can really be a win for smaller regions in Sweden,” says Tåg.

In addition to Chromogenics, another recent example is the eyewear company Synsam moving production from China to Östersund in Jämtland. The new factory is expected to open in 2022 and will create around 200 jobs.

Nor is the trend limited to manufacturing; Tåg says it encompasses “all kinds of industries” in Sweden. Some IT and legal services jobs that moved to the Balkans, for example, are also starting to come home.

Photo: Chromogenics

Slowbalisation not deglobalisation

Some economists have talked about globalisation changing to an era of ‘slowbalisation’ since the 2008 financial crisis. Tåg, director of IFN’s Firm Competitiveness research programme, says the “immense growth in globalisation” that was dominant in recent decades is over. But he adds: “There’s a deceleration of globalisation but it’s not going into reverse.” 

He estimates that between two and five percent of Swedish firms that took production abroad have moved it home or are doing so. While more companies continue to offshore operations than move home at present, Tåg says he does expect the homecoming trend to continue.

Ljungqvist believes it’s becoming more attractive to many mid-sized and smaller Swedish companies as a result of Covid-19. “People will look to have better control over their supply chain and other things,” says the CEO. “The pandemic hadn’t started when the decision was taken. But now we feel quite lucky as we have other contractors that have been affected by Covid.”

Looking ahead, he predicts: “With really high volume production, it might still be worth going to China. But with mid-sized and smaller volumes, I think production will be coming back to Sweden.”

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PROPERTY

EXPLAINED: Will Swedish housing prices plummet as interest rates rise?

The Swedish financial supervisory authority warned on Wednesday that rising interest rates could lead to house prices falling "quite sharply". How likely is it that this will happen?

EXPLAINED: Will Swedish housing prices plummet as interest rates rise?

What financial circumstances might make it difficult for borrowers to repay loans?

With an increase in the cost of living, including rising interest rates and rising electricity prices, there are plenty of circumstances that may make it difficult for borrowers – especially those holding large debts in relation to their income – to repay their mortgages.

Households with large debts are therefore more sensitive to an increase in interest rates, according to the Swedish financial supervisory authority, known in Swedish as Finansinspektionen (FI).

The agency published its annual Swedish Mortgage Market report on Wednesday.

“Large debts also mean a higher sensitivity if you were to suffer unemployment during an extensive recession,” said Henrik Braconier, the authority’s chief economist.

Other factors that could stretch borrowers’ finances include rising energy prices, higher food prices, and growing inflation.

“Apples, oranges, tomatoes have gone up by 30 percent,” said Américo Fernández, a household economist at SEB. “Wheat is coming from Ukraine and it’s getting harder and harder to get hold of.”

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Will homeowners become unable to repay their mortgage loans?

Not according to Fernández.

“One of the last things Swedish households will fail to make their payments on is their mortgage and their houses,” he said. “They would rather decrease their spending on vacations abroad, or restaurants.”

The FI report noted that most new mortgages include margins that allow for fluctuations in the borrower’s finances. This means that mortgage holders have a cushion that allows them to handle financial changes.

“Our stress test shows that they can handle increases in the interest rate and also loss of income,” said Magnus Karlsson, FI’s director of macroanalysis. “New mortgages have margins in them calculating discretionary income, and will be able to absorb increases in interest rates and loss of income.”

SEB foresees an interest rise of up to three percent over the next two years, Fernández said,an increase that can be absorbed by most households.

Both Fernández and Karlsson agreed that if homeowners have to cut back on spending, those cuts will not come from debt repayment, but from their disposable income – the money they might ordinarily spend on entertainment, eating out, or travelling.

So while household spending may have to change, financial stability is not at stake for most households.

What’s going on with the housing market?

Right now, a record number of mortgage-holders have loans that are worth more than 4.5 times their income. This year, more than 14 percent of new mortgagors took on such large loans, compared to 6.3 percent last year.

A “low interest rate, increase in housing prices, increase in disposable real income and a housing market that is not functioning well” are all factors in the large debts that homeowners have incurred today, Karlsson argued.

Fernández noted that there is an imbalance between the low supply of housing and the high demand for housing, which is in part responsible for the high housing prices we see today.

He said a decrease in price of a few percentage points would not be surprising: “We’re coming from two years of exaggerated prices.”

Will housing prices begin to decrease after two years of increasing prices?

Calculations for three different scenarios tested by FI show that housing prices will decrease, Karlsson said.

While the agency does not predict housing prices, its report shows that under three different scenarios – the first an increase in mortgage interest rate, the second an increase in energy prices, and the third a combination of the first two with a reversal to pre-pandemic housing preferences – prices will decrease.

The Local Sweden reported last year about increasing housing costs in Sweden, spurred on in part by a desire for bigger homes further away from urban areas during the COVID-19 pandemic.

Fernández called the two years of increasing housing costs “surprising.”

“10-12 percent two years in a row, that’s historical in these uncertain times,” he said, noting that prices were still increasing in figures for March this year.

What sorts of housing will see the largest price decrease?

The FI report also included various scenarios of how the price of different types of housing may fluctuate based on changes in the interest rate.

One scenario assumed a 1 percent increase in interest rates this year and a 0.5 percent increase next year, and predicted that while the price of apartments owned in a cooperative – called bostadsrätter – would fall only slightly, the price of detached houses would fall by 10 percent.

Another calculation that accounted for rising electricity prices and a decline in new housing purchases found that the price of bostadsrätter and detached houses risked falling by an average of 30 percent.

Is there a plan to let borrowers end their mortgage terms early?

“We believe it needs to be simpler and more inexpensive for households to repay their mortgages early,” FI Director General Erik Thedéen is quoted as saying in a press release published by the agency on Wednesday.

To that end, Thedéen said at a press conference that the agency had sent a request to the government to change the calculation model for how banks are compensated when mortgages are terminated early.

“When you terminate a loan agreement and the bank incurs costs, it must be reimbursed,” Thedéen said. “But at present the banks are overcompensated, that is what our calculations show. If the government follows our line and changes the model and follows our line, then the banks must simply adapt.”

When asked about the likelihood of this request being granted, FI recommended reaching out to the Ministry of Justice for comment.

What does this mean for foreigners in Sweden?

If you’re already a mortgage holder, then as Karlsson and Fernández assured, mortgage calculations include a cushion that allow for changes in your financial circumstances.

If homeownership is in your future, housing prices may begin to decrease in the near future, so it’s worth keeping an eye on your local real estate listings.

By Shandana Mufti

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